SEC News Digest

Commission Announcements

The Securities and Exchange Commission today charged H&R Block subsidiary Option One Mortgage Corporation with misleading investors in several offerings of subprime residential mortgage-backed securities (RMBS) by failing to disclose that its financial condition was significantly deteriorating.

Option One, which is now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges.

The SEC alleges that Option One promised investors in more than $4 billion worth of RMBS offerings that it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. But Option One did not tell investors about its deteriorating financial condition and that it could not meet its repurchase obligations on its own.

“Option One’s financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The company nonetheless concealed from investors that its perilous finances created risk that it would not be able to fulfill its duties to repurchase or replace faulty mortgages in its RMBS portfolios.”

Kenneth Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “We will take action against those who fail to disclose or downplay important facts that make an investment riskier, even if those risks do not materialize. We remain committed to uncovering misconduct involving complex financial instruments including RMBS.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Option One was one of the nation’s largest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. Option One originated subprime loans and sold them in the secondary market through RMBS securitizations or whole loan pool sales.

According to the SEC’s complaint, Option One was generally profitable prior to its 2007 fiscal year. However, when the subprime mortgage market started to decline in the summer of 2006, Option One experienced a decline in revenues and significant losses, and faced hundreds of millions of dollars in margin calls from its creditors. At the time Option One offered and sold the RMBS, it needed H&R Block, through a subsidiary, to provide it with financing under a line of credit in order to meet its margin calls and repurchase obligations. But Block was under no obligation to provide that funding. Option One did not disclose this information to investors. The SEC further alleges that Block never guaranteed Option One’s loan repurchase obligations and that Option One’s mounting losses threatened Block’s credit rating at a time when Block was negotiating a sale of Option One.

Without admitting or denying the SEC’s allegations, Option One consented to the entry of an order permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and requiring it to pay disgorgement of $14,250,558, prejudgment interest of $3,982,027, and a penalty of $10 million. The proposed settlement is subject to court approval.

The SEC has now charged 102 individuals and entities in financial crisis-related enforcement actions, including 55 CEOs, CFOs, and other senior corporate officers. These enforcement actions have resulted in more than $1.98 billion in penalties, disgorgement, and other monetary relief for investors.

The SEC also is a co-chair of the Residential Mortgage-Backed Securities Working Group formed under the Financial Fraud Enforcement Task Force in January 2012. The Working Group is marshaling parallel efforts on the state and federal levels to collaborate on current and future investigations, pooling resources and streamlining processes to investigate in a comprehensive way those responsible for misconduct in the RMBS market. In addition to the SEC, other co-chairs of the Working Group include representatives from the Civil and Criminal Divisions of the U.S. Department of Justice, the Attorney General of the State of New York, and the United States Attorney’s Office.

The SEC’s investigation of Option One was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio and the Chicago Regional Office. The investigative attorneys were Daniel Ryan, Michael Wells, Anne McKinley, and Robert Burson along with litigation counsel Jonathan Polish and John Birkenheier in the Chicago Regional Office. (Press Rel. 2012-76)

Rules and Related Matters

Order Temporarily Exempting Broker-Dealers from the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 under the Securities Exchange Act of 1934 and Granting an Exemption for Certain Securities Transactions

The Commission issued an order temporarily exempting broker-dealers from the recordkeeping, reporting, and monitoring requirements of Rule 13h-1 under the Securities Exchange Act of 1934 and granted an exemption for certain securities transactions. Publication of the order is expected in the Federal Register during the week of April 23. (Rel. 34-66839)

Enforcement Proceedings

In the Matter of Advanced BioPhotonics, Inc.

An Administrative Law Judge issued an Order Making Findings and Revoking Registration by Default as to Advanced BioPhotonics, Inc., Advanced Viral Research Corp., and Brantley Capital Corp., and Setting Second Prehearing Conference (Default Order) in Advanced BioPhotonics, Inc., Admin. Proc. 3-14815. The Default Order finds that Advanced BioPhotonics, Inc., Advanced Viral Research Corp., and Brantley Capital Corp., are issuers of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act), and that they have failed to comply with Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13 by failing to file required periodic reports with the Securities and Exchange Commission.

The Default Order requires that 4C Controls, Inc., and 2-Track Global, Inc., file Answers by April 27, 2012, and that these Respondents and Brilliant Technologies Corporation disclose at a telephonic prehearing conference on May 29, 2012, whether they have filed their missing periodic reports. (Rel. 34-66849; File No. 3-14815)

In the Matter of BIOTECH Holdings, Ltd.

An Administrative Law Judge issued an Order Making Findings and Revoking Registrations by Default as to Four Respondents (Default Order) in BIOTECH Holdings, Ltd., Admin. Proc. 3-14763. The Commission revoked the registration of the fifth Respondent’s, California Oil and Gas Corp., registered securities on April 4, 2012. (Rel. 34-66730)

The Default Order finds that the allegations in the Order Instituting Proceedings are true; BIOTECH Holdings Ltd., Central Minera Corp., Chemokine Therapeutics Corp., and Global Precision Medical Inc., issuers of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act), failed to comply with Exchange Act Section 13(a) and Exchange Act Rules 13a-1 and 13a-13 by failing to file required periodic reports with the Securities and Exchange Commission. As a result, the Administrative Law Judge ordered the revocation of the registration of each class of each of Respondent’s registered securities. (Rel. 34-66850; File No. 3-14763)

In the Matter of Eugene Science, Inc.

An Administrative Law Judge issued an Order Revoking Registration by Default (Default Order) in Eugene Science, Inc., Proc. 3-14805. The Default Order finds that the allegations in the Order Instituting Proceedings are true, Eugene Science, Inc., an issuer of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act), failed to comply with Exchange Act Section 13(a) and Exchange Act Rules 13a-1 and 13a-13 by failing to file required periodic reports with the Securities and Exchange Commission. As a result, the Administrative Law Judge ordered the revocation of the registration of each class of Respondent’s registered securities. (Rel. 34-66851; File No. 3-14805)

In the Matter of Ryan Mark Reynolds

The Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, and Notice of Hearing (Order) against Ryan Mark Reynolds of Dallas, Texas.

The proceedings are based on an April 10, 2012, amended judgment that enjoined Reynolds from violating Sections 5(a) and 5(c) of the Securities Act of 1933, and Section 15(a)(1) of the Securities Exchange Act of 1934 in a civil action entitled Securities and Exchange Commission v. Phillip W. Offill, Jr., et al., Civil Action Number 07-cv-1643-D (N.D. Tex.). In the Order, the Division of Enforcement alleges that Reynolds, a former stock broker, engaged in a scheme to evade the registration requirements of the federal securities laws by offering and selling the securities of six companies when no registration statements were filed or in effect for their sales transactions. The Order also alleges that Reynolds acted as an unregistered dealer by engaging in the business of underwriting public securities offerings and effecting transactions in securities by buying and selling securities for his own accounts and for the accounts of RSMR Capital Group Inc., a Texas corporation that he and another owned. The Order further alleges Reynolds was not registered or associated with a broker or dealer during the time when he offered and sold the securities at issue in the case.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide the Respondent with an opportunity to dispute these allegations, and to determine what sanctions, if any, are appropriate and in the public interest. The Order requires that the administrative law judge issue an initial decision no later than 210 days from the date of service of the Order. (Rel. 34-66852; File No. 3-14855)

In the Matter of Egan-Jones Ratings Co. and Sean Egan

The Securities and Exchange Commission today announced charges against Egan-Jones Ratings Company (EJR) and its owner and president, Sean Egan, for material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for issuers of asset-backed securities (ABS) and government securities. EJR and Egan are also charged with material misrepresentations in other submissions furnished to the Commission, and violations of recordkeeping and conflict-of-interest provisions governing NRSROs.

The Commission issued an order instituting proceedings in which the SEC’s Division of Enforcement alleges that EJR, a credit rating agency based in Haverford, Pennsylvania, submitted an application to register as an NRSRO for issuers of asset-backed and government securities in July 2008. EJR had previously registered with the Commission in 2007 as an NRSRO for financial institutions, insurance companies, and corporate issuers.

The SEC’s Division of Enforcement alleges that in its 2008 application, EJR falsely stated that, as of the date of the application, it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. EJR further falsely stated in its 2008 application that it had been issuing credit ratings in the ABS and government categories as a credit rating agency on a continuous basis since 1995. In fact, at the time of its July 2008 application, EJR had not issued — that is, made available on the Internet or through another readily accessible means — any ABS or government issuer ratings, and therefore did not meet the requirements for registration as an NRSRO in these categories. EJR continued to make material misrepresentations regarding its experience rating asset-backed and government securities in subsequent annual certifications furnished to the Commission.

The SEC’s Division of Enforcement also alleges that EJR made other misstatements and omissions in submissions to the Commission by providing inaccurate certifications from clients, failing to disclose that two employees had signed a code of ethics different than the one EJR disclosed, and inaccurately stating that EJR did not know if subscribers were long or short a particular security.

The SEC’s Division of Enforcement further alleges that EJR violated other provisions of the Commission rules governing NRSROs. EJR failed to enforce its policies to address conflicts of interest arising from employee ownership of securities, and allowed two analysts to participate in determining credit ratings for issuers whose securities they owned. EJR also failed to make and retain certain required records, including a detailed record of its procedures and methodologies to determine credit ratings and emails regarding its determination of credit ratings.

The SEC’s Division of Enforcement alleges that Egan provided inaccurate information that was included in EJR’s applications and annual certifications, signed the submissions, and certified that the information provided in them was “accurate in all significant respects,” when he knew that it was not. Egan also failed to ensure EJR’s compliance with the recordkeeping requirements and conflict-of-interest provisions.

The SEC’s Division of Enforcement alleges that, by the conduct described above, EJR willfully violated Exchange Act Sections 15E(a)(1), 15E(b)(2), 15E(h)(1) and 17(a), and Rules 17g-1(a), 17g-1(b), 17g-1(f), 17g-1(a)(2), 17g-2(a)(6), 17g-2(b)(2), 17g-2(b)(7), and 17g-5(c)(2). The Division of Enforcement further alleges that, by the conduct described above, Egan willfully made, or caused EJR to make, material misstatements in its Form NRSRO; and caused or willfully aided, abetted, counseled, commanded, induced or procured EJR’s violations of Sections 15E and 17(a) of the Exchange Act and Rules 17g-1, 17g-2, and 17g-5.

A hearing in this matter will be scheduled before an Administrative Law Judge, who will hear evidence from the Division of Enforcement and EJR and Egan. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision no later than 300 days from the date of service of the Order. (Rel. 34-66854; File No. 3-14856)

SEC Obtains an Asset Freeze and Other Relief Against Allen Weintraub to Halt His Fraudulent Scheme of Purportedly Selling Pre-IPO Facebook Shares

On April 4, 2012, the U.S. District Court for the Southern District of Florida in Miami issued an Order to Show Cause and Other Emergency Relief (Order) to halt Allen Weintraub’s ongoing fraudulent scheme of selling securities of an investment vehicle that he falsely represented owned pre-IPO shares of Facebook, Inc. The Court’s Order temporarily freezes the assets of Weintraub and certain shell companies through which he apparently operates. The order also directed Weintraub to demonstrate, among other things, why he should not be held in contempt for violating the Court’s Final Judgment in SEC v. Allen E. Weintraub and AWMS Acquisition, Inc., d/b/a Sterling Global Holdings, Case No. 11-21549-CIV-HUCK/BANDSTRA (S.D.Fla.), which was entered on January 10, 2012 (Final Judgment). The Final Judgment enjoined Weintraub from violating, among other things, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The Commission’s motion for an order to show cause alleges that in February 2012, Weintraub, acting through an alias, William Lewis, and through entities named Private Stock Transfer, Inc., PST Investments III, Inc. (PST Investments), and World Financial Solutions, defrauded investors by selling them worthless shares in PST Investments. Weintraub had falsely represented that he would sell the investors pre-IPO shares of Facebook, Inc., and that PST Investments had an ownership interest in Facebook stock. The Commission’s motion also alleges that Weintraub was utilizing the website privatestocktransfer.com to perpetrate his scheme. The Court’s Order directed that this website be deactivated. The Division of Enforcement urges anyone who believes that Allen Weintraub may have recently defrauded them to contact John Rossetti, Senior Counsel, at 202-551-4819.

On December 30, 2011, the Court entered an order granting the Commission’s motion for summary judgment against Weintraub and his shell company, Sterling Global. In its Order, the Court found that Weintraub deceived the public by making false and misleading statements regarding Sterling Global’s ability to purchase and operate Eastman Kodak Company and AMR Corporation. The Court’s January 2012 Final Judgment permanently enjoined Weintraub and Sterling Global from future violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-8 thereunder, and ordered them to each pay a civil money penalty in the amount of $200,000. See Litigation Release 22225 (January 11, 2012). [SEC v. Allen E. Weintraub and AWMS Acquisition, Inc., d/b/a Sterling Global Holdings, Case No. 11-21549-CIV-HUCK/BANDSTRA (S.D.Fla.)] (LR-22343)

Other Commission Orders, Notices, and Information

Order Approving Application for Relief From a Statutory Disqualification

On April 23, 2012, the Commission issued an Order approving the application of the Financial Industry Regulatory Authority (f/k/a National Association of Securities Dealers, Inc.) for relief from a statutory disqualification, permitting Kevin J. McCaffrey to associate as a general securities representative with Citigroup Global Markets, Inc. (CGMI), a member of FINRA. The Order states that, based on the representations made by FINRA and CGMI with respect to the supervision of Mr. McCaffrey and the conditions placed on his employment, the Commission will not institute proceedings pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), and will not direct FINRA to bar the proposed association, as provided in Section 15A(g)(2) of the Exchange Act. (Rel. 34-66844)

Investment Company Act Releases

Advisors Series Trust
Orinda Asset Management, LLC

A notice has been issued giving interested persons until May 18, 2012 to request a hearing on an application filed by Advisors Series Trust and Orinda Asset Management, LLC, for an order exempting applicants from Section 15(a) of the Investment Company Act of 1940 (Act) and Rule 18f-2 under the Act, as well as from certain disclosure requirements. The order would permit the applicants to enter into and materially amend subadvisory agreements without shareholder approval and would grant relief from certain disclosure requirements. (Rel. IC-30043 — April 23)

Self-Regulatory Organizations

Proposed Rule Change

NYSE Arca, Inc. filed a proposed rule change (SR-NYSEArca-2012-34) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder to list and trade the Huntington US Equity Rotation Strategy ETF and Huntington EcoLogical Strategy ETF under NYSE Arca Equities Rule 8.600. Publication is expected in the Federal Register during the week of April 23. (34-66846)

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by Chicago Mercantile Exchange Inc. (CME) amending rules regarding clearing member anti-money laundering programs (SR-CME-2012-12) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of April 23. (34-66847)

A proposed rule change submitted by The NASDAQ Stock Market LLC (SR-NASDAQ-2012-052) relating to SQF and BONO port fees and account fees has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of April 23. (34-66848)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.